These Hidden Costs Could Hurt Your Wealth

Businesses that don't shape up environmentally could damage their bottom lines.

If businesses ever hope to achieve the sustainable profitability we investors crave, they'll have to adopt sustainable practices. Otherwise, the hidden costs of wreaking environmental havoc could put more than half of all corporate profits at risk.

The real cost of ecological mishapsThe Corporate Library's blog recently pointed to a report from Trucost, an environmental research firm that has finally placed a price tag on the specific environmental costs that companies shift onto other businesses and the rest of society.

According to Trucost's data, human activity caused $6.6 trillion in environmental damage in 2008. The top 3,000 global companies were responsible for $2.15 trillion of that expense. If companies and consumers continue on this destructive course, annual environmental costs could reach $28.6 trillion by 2050.

Although more and more shareholders (including socially responsible investors) take environmental policies into account these days, many investors still don't. Perhaps this statistic will finally get their attention: Trucost estimated that environmental costs could endanger about 50% of corporate profits.

Pollution, for instance, can cost individuals dearly through higher medical costs, or steeper taxation to deal with the resulting damage. Indirectly, these expenses can also stunt economic growth for corporations that weren't directly responsible for the damage. Directly, the companies that actually were responsible will often find themselves legally liable to pay out for damages.

The claims BP(NYSE: BP) must pay in the wake of its high-profile Gulf of Mexico spill provide a good example, as does all the peripheral damage that snowballed out of the initial disaster. As the spill gushed into the Gulf, area residents feared that its economic and ecological damage would hurt other businesses in the region. Tourists generally avoid oil-polluted beaches, and sickly, poisoned marine life hurts the prospects for fishing operations and restaurants alike. Sustained, major ecological damage would have dragged out those problems to haunt the entire region for months or years to come. The spill and its effects on local businesses could also have placed even heavier burdens on surrounding states' already overextended governments, as more unemployed workers appealed for benefits and other aid.

Paving a path to responsibilityFortunately, more companies are trying to address environmental ills that could cause economic problems down the road. Here are just a few examples:

Wal-Mart's (NYSE: WMT) pushing many sustainability initiatives, including plans for a Sustainability Index among its vendors and suppliers.

Starbucks(Nasdaq: SBUX) recently tested recycling for its paper cups.

Meanwhile, more shareholders are pressuring companies to pay greater attention to sustainability. Last March, climate-change-related shareholder proposals filed at publicly traded companies increased 40%, to a record 95 resolutions.

Think long-term and big pictureThe ever-escalating costs of environmental damage hurt us all, as investors, individuals, and citizens. And squandering natural resources to make a quick profit right now will harm many investments' ability to pay off in the future.

Despite Trucost's dire data, it's good to see the recent litany of news regarding corporate social responsibility initiatives, as more corporations see the writing on the wall. Many companies' own financial futures will be far brighter if they address sustainability issues now, in real, quantifiable ways. The search for sustainable innovation is on, and investors should look for the leaders in this scramble.

More and more shareholders should push their companies to address environmental issues. Future cash flows could depend on it. Short-term scorched-earth policies won't lead to future prosperity for companies, investors, or anyone else.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax